Asia Markets recap: The China Factory Story

March 2, 2014, 6:46 PM ET

Reuters

Welcome to the Asia Markets live blog, a running account of what the region’s stock markets are doing, along with other news. Today, the second of a pair of readings on China’s manufacturing sector, due out from HSBC, may move the region’s shares. And watch out for Ukraine…

With the heavily weighted miners and banks trading lower this morning, the ASX 200 has nowhere to go but down, currently off 0.7%.

While BHP Billiton’s 1.9% loss is due in large part to its shares trading without rights to the latest dividend, the broader weakness is likely about China. The official version of China’s PMI manufacturing gauge, released Saturday, dipped to an eight-month low of 50.2 for February, off from from January’s 50.5.

As always though, things could be worse, and at least the headline index was above the consensus expectation. Meanwhile, markets are awaiting the HSBC edition of the China PMI, due later this morning.

As for Sydney-listed miners, Rio Tinto is off 0.9%, Fotescue Metals is 2% lower, Alumina is down 2.7%, and Whitehaven Coal carries a loss of 2.6%.

Among financials, the big banks are weaker (ANZ down 1.2%, NAB down 0.8%, and Westpac down 1.1%). As for insurers, IAG is 1.2% in the hole, while AMP is down 2.7% as it, like BHP, trades ex-dividend.

Having enjoyed gains for much of February, Woolworths is 2% lower today after Macquarie cut its rating on the stock to underperform from neutral.

On the upside, waste-management firm Transpacific Industries is 1% higher after announcing the sale of its New Zealand business to a state-owned Chinese firm.

And energy is up too, with Oil Search and Woodside Petroleum ahead by 2.3% and 0.8%, respectively, as crude-oil futures rally. Meanwhile, gold miners are well-bid (Newcrest and Evolution Mining each up 3.2%), as a survey out Sunday showed Australian gold output at its highest level in a decade.

Today’s word of the day on the Japanese markets is “kuma,” meaning “bear,” as in “The bears are selling equities, with the Nikkei Average and Topix each down 1.8%.”

And there’s lots to be bearish about this morning — the dollar is at 101.35 yen after trading above 102 yen during much of the previous stock session. There’s a brewing conflict in Ukraine, weak Chinese manufacturing data (as mentioned previously in today’s blog), and various stock-specific bad news.

The stronger yen is slapping around many of the major tech and industrial exporters: Sony is down 2.8%, Panasonic is down 3%, Mitsubishi Heavy Industries is down 3.1%, Renesas Electronics is down 3.7%, and Pioneer is down 4.4%.

And telecoms, those are much weaker as well, with Softbank down 3.5%, NTT Docomo down 3% and KDDI down 2.4%.

Astellas Pharma has lost almost 4% ahead of a 5-for-1 stock split, and Sega Sammy is wallowing in a 4% loss of its own after cutting its full-year net-profit forecast by slightly more than a third.

Some of the utilities saw early gains after J.P. Morgan raised the ratings on a number of players, but currently Hokkaido Electric (which JPM upped to a neutral rating) and Tohoku Electric (raised to outperform) are the only gainers, up 1.4% and 0.3%, respectively.

Both the official and HSBC versions of China’s monthly manufacturing survey show the sector weaker last month than it was in January. But since analysts expected an even worse slowdown for Chinese factories, Hong Kong stocks are off their opening lows, and Shanghai has swung to a gain.

So first we had Saturday’s release of the government’s manufacturing Purchasing Managers’ Index showing a drop to 50.2 from 50.5, just above the expansion/contraction boundary of 50 and coming in at an eight-month low — BUT it was better than the average forecast, per a Wall Street Journal poll.

Then this morning, we had HSBC’s PMI falling to 48.5 from 49.5 — BUT it was above the preliminary “flash” version, released last month.

AND for good measure, the government’s services PMI actually posted a solid rise.

As a result, Hong Kong’s Hang Seng Index is now down 0.5% against an opening loss of 1%, and the Shanghai Composite up 0.4% after starting marginally to the downside.

Still, those numbers hide widely different fortunes for individual issues. Looking first at the decliners, we see Hong Kong real-estate major Sun Hung Kai off 2.4% after posting a drop in first-half net profit on the back of a decline in domestic sales.

Some mainland developers are also seeing their Hong Kong-listed shares move downward, with Credit Suisse citing their exposure to dollar-denominated debt as the yuan loses ground, and with Kim Eng Securities pointing to Chinese regulators saying they will pay close attention to possible risk contagion due to cash shortages in the sector.

Hence: China Overseas Land is down 1.7%, China Resources Land is off 1.2%, and Agile Property is 1.8% lower.

Also among the Hong Kong losers this morning, China Eastern Airlines is 2.1% lower after announcing plans to buy 70 Airbus jets.

And the winners? For one, FIH Mobile is up 2.1%, thanks in part to a BNP Paribas ratings upgrade to hold from reduce.

Likewise, Zijin Mining is up 1.8% amid a rally in spot gold prices, and Hutchison Whampoa is 0.7% higher after showing off a 20% gain in 2013 net profit (and likely aided a bit by arch-tycoon Li Ka-shing’s announcement he would continue to run the company and had no plans to retire).

It looks like markets have now fully digested the bad news that China’s manufacturing growth is slowing.

The freshly released results of China’s manufacturing PMI from HSBC showed a fall to 48.5 in February from January’s 49.5, but slightly better than the previous, “shocking” reading of 48.3. Read more here.

Despite a market consensus that China’s growth will moderate further over the near term, analysts still consider the ugly face of the February data largely due to distortions by the Lunar New Year holiday.

“Policies are unlikely to be affected by these distorted PMI readings,” said Bank of America-Merrill Lynch analysts in a note on Monday morning, “We suggest investors not read too much into the PMI ‘slowdown’ in February.”

The analysts note that the HSBC PMI (as compared to the official version, released on Saturday) was especially vulnerable to the holiday impact, as it mainly covers small enterprises which show more seasonal impact.

As a result, says Kim Eng Securities analyst Andrew Sullivan, “March data will be much more informative.”

“Given the very low inflation reading, we think [China's] government has enough policy room to achieve 7.5% GDP growth this year … at the moment, it only needs to stick to a neatral stance on both fiscal and monetary policies,” said Merrill Lynch economists Ting Lu and Xiaojia Zhi.

In any case, the market’s verdict was a positive one, as Hong Kong’s Hang Seng Index narrowed its opening losses, and the Shanghai Composite Index even swung to a gain. (See previous post in today’s blog.)

Don’t be fooled, writes Craig Stephen in his MarketWatch column this week: Just because most people think the Chinese government engineered the recent drop in the yuan doesn’t mean investors can ignore it.

For one thing, a weakening of the yuan does not insure that hot money has stopped rushing into the world’s second-largest economy.

And besides, there are signs that the central bank may have waited too long to introduce volatility into the yuan trade, a trade that was for many years a one-way bet.

What’s the hottest topic on China’s social media right now? Well, the 2014 Oscars ceremony and the freshly released China PMI all ranked highly on Weibo on Monday. But there’s a simple Chinese phrase which seems to have gained even more popularity among the public: “You know what I mean.”

Why?

Remember Bo Xilai, the disgraced Chinese politician purged in a great political scandal in China last year, whose trial captivated readers around the world?

Well, it appears the political drama is entering its second chapter right now, but this time, it’s all about the mysterious fate of an even bigger political giant — Zhou Yongkang, previously a Politburo member, the head of China’s security and a close ally and supporter of Bo Xilai.

As China’s graft investigation has swept into the offices of top oil executives and major government officials, to the surprise of the public, many observers have wondered about the fate of Zhou, who also headed the state energy giant China National Petroleum Corporation in the 1990s before rising up the government ladder to become one of the most powerful men in China. Zhou has disappeared from the news for several months.

On Sunday, a government official commented for the first time on Zhou in recent months, a very rare move by the Chinese Communist Party, though the details were slim.

“Anyone who violates the party’s discipline or state law will be strictly investigated and seriously punished, no matter who he is, or how senior his position is,” the government spokesman said at a news conference in response to a journalist’s question. “I can only answer so much right now. You know what I mean,” the official added.

This sentence — “You know what I mean” — has since gone viral on Chinese social media, even triggering rumors that a high-level power struggle may have come to an end, with Zhou losing the battle.

Several of Zhou’s men were reportedly removed from their posts or are under investigation. And Zhou Bin, Zhou’s well-known son, was taken away by the police along with his wife in December, Beijing-based Caixin reported Sunday.

Maybe there won’t be much more of a wait before we get the final truth. As it’s been said on the Chinese media, “everyone is waiting for the riddle’s answer to come to light.”

For the fourth session in a row, Japan’s Nikkei Average is ending with a loss — in this case, a solid drop of 1.3%.

Some of this was about the strong yen: NEC lost 3.8%, Renesas and Sharp fell 3.7% each, Fujifilm closed 3.4% lower, and so on.

On the winning side, an almost 40% surge in Honda Motor’s Japanese sales for February pushed its stock to finish 1.7% higher. (Though Toyota Motor’s 13% sales gain couldn’t save its shares from a 1.1% loss — read more on the auto-sales results here.)

And at the end of the day, the J.P. Morgan stock-rating upgrades for the utilities sector (see earlier post in this blog) appeared to have helped some names, as Hokkaido Electric added 0.9%, Tohoku Electric rose 2.1%, and Shikoku Electric gained 1.3%.

Meanwhile, there were also some spectacular turnarounds: Panasonic went from a 3% loss at one point to close 0.3% higher, and Sega Sammy went all the way from trading down 4% to ending 1.2% up.

Differing from Merrill Lynch’s economists, who belived the recently released China PMI data were heavily distorted by the Lunar New Holiday and have limited economic impact, analysts from Capital Economics said the data signal a genuine slowdown in China’s manufacturing sector, and their outlook remains downbeat.

“We suspect that policy makers will make further efforts to slow credit growth, which should continue to weigh on domestic demand and manufacturing activity,” said Julian Evans-Pritchard, China economist for Capital Economics.

Evans-Pritchard pointed to the recent liquidity surge and the central bank’s repeated reaction of draining funds from the money markets as indicating China’s determination to cool the credit market.

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